Shipping demand from South East Asia set to soar

More manufacturers will start to shift production out of China due to the threat of US tariffs during 2019, according to leading logistics executives and analysts.

Trade in 2018, particularly on the transpacific, was marked by the US-China trade war which escalated as the year went on. Although a truce is currently in place as the two sides continue negotiations, the ongoing risk of tariffs becoming a long-term threat to trade is prompting some shippers to seek out alternative sourcing options for the US market.

Christian Pedersen, vice president and head of trade and marketing for Maersk Line in North America, told Lloyd’s Loading List that during 2018, as tariffs escalated, many US importers tried to split the bill with Chinese suppliers by negotiating discounts so only part of the cost increase due to tariffs was passed on to customers.

Now, however, he said many of the line’s customers were looking at shifting production away from China and this would drive box volumes out of South East Asia during 2019.

“Speaking to most of our customers about whether they'll actually insource production (to the US), or whether they'll keep buying overseas, the large majority say that they may consider some origin shift between China and Southeast Asia, but we see very little activity to move to insourcing”, he said.

Indeed, the trend was already apparent last year, helping explain why Vietnam’s exports surged 16.1% year-on-year in 2018, putting its key ports and airports under pressure for much of the year.

Brian Wu, chairman of the Hong Kong Association of Freight Forwarding, said he expected the drift of production to South East Asia to continue in 2019. “I visited Myanmar in late November and you can see this trend there – it will continue in future,” he said.

Stewart Sinclair, Managing Director of Bangkok Flight Services, one of the two leading freight ground handlers at Bangkok’s Suvarnabhumi Airport, said there would be a limit to how much manufacturing could be transferred out of China in the short-term.

“Regarding moving production out of China to beat the tariffs, this has already been done where there is capacity, with Vietnam being a big gainer”, he said. “But there is not much spare production capability so once this has been used up then this will taper off. You can’t set up clean facilities overnight, it would take at least a year to move production for most of the electronics or automotive electronics”.

Stifel also noted that any large-scale shift of production capacity out of China would be a long-term process, but shippers would likely move what they could in the short-term.

“While there are rumblings about modifying sourcing, and we believe manufacturing should continue to shift - mainly around Asia - most companies have yet to put any plans into action”, concluded the analyst following a webinar last week. “It is difficult to change, as many companies have long-time relationships with contract manufacturers or have invested in their own facilities.

“Most likely, companies may try one product line or a handful of vendors first. We are early on in any migration away from China”.

Cathy Roberson, founder and head analyst at US-based consulting firm Logistics Trends & Insights, told Lloyd’s Loading List that while there had been a lot of talk about moving manufacturing out of China because of tariffs, it was not easy and quick to do

“I do think SE Asia will benefit but the region will still be tied to China in one way or another,” she said. “I don't see the entire supply chain shifting to South East Asia. Products could possibly still be made in China with final assembly and shipment done in South East Asia, for example.

“Many manufacturers’ supply chains have become entrenched within the APAC region to the point that it would take months, if not years, to unwind.

She also predicted more manufacturers would move production to the US to be closer to market. “A growing number of manufacturers are investing more in automation and other technologies and bringing operations back to the U.S,” she said. But because of the automation, not as much labour is needed.

“However, this is not necessarily because of tariffs but more of an opportunity to move closer to the customer - a growing trend for many manufacturers.”